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Y2 Micro > 3.3 Revenues, Costs And Profits > Flashcards

3.3 Revenues, Costs And Profits Flashcards

1
Q

What is total revenue (TR)?

A

The total amount of money coming into the business through the sale of goods and services: quantity x price

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2
Q

What is average revenue (AR)?

A

The total revenue divided by output

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3
Q

Define marginal revenue (MR).

A

The extra revenue that the firm earns from selling one more unit of production

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4
Q

What is the relationship between price elasticity and marginal revenue?

A

If MR is positive, demand is elastic; if MR is negative, demand is inelastic; if MR=0, demand is unitary elastic

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5
Q

True or False: In perfect competition, MR=AR=D.

A

True

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6
Q

What characterizes a downward sloping demand curve?

A

Price decreases as output increases, indicating some price setting power

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7
Q

What happens to total revenue (TR) when marginal revenue (MR) is positive?

A

TR increases as output increases

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8
Q

What occurs at the point where MR=0?

A

Total revenue is maximized

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9
Q

What is the economic cost of production?

A

The opportunity cost of production; value that could have been generated in the next best use

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10
Q

Differentiate between total fixed cost (TFC) and total variable cost (TVC).

A

TFC does not change with output; TVC changes directly with output

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11
Q

What does the average total cost (ATC) represent?

A

Total costs divided by output

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12
Q

Fill in the blank: The law of _______ states that if a variable factor is increased when another factor is fixed, marginal output will decrease.

A

Diminishing Returns

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13
Q

What shape is the average total cost curve (ATC) and why?

A

U-Shaped due to the law of diminishing marginal productivity

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14
Q

When does the marginal cost (MC) curve intersect the average cost (AC) curve?

A

At the lowest point on the AC curve

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15
Q

What is the minimum efficient scale?

A

The minimum level of output needed for a business to fully exploit economies of scale

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16
Q

What are internal economies of scale?

A

Advantages a firm enjoys due to its own growth

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17
Q

Name two types of internal economies of scale.

A
  • Technical economies
  • Financial economies
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18
Q

What are diseconomies of scale?

A

Disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise

19
Q

What are external economies of scale?

A

Advantages arising from the growth of the industry, independent of the firm

20
Q

How do large firms benefit from purchasing economies?

A

They can buy in bulk and often at lower prices than smaller competitors

21
Q

What is the effect of geography on diseconomies of scale?

A

Transportation of finished products over long distances can increase costs and complicate management

22
Q

Fill in the blank: A firm experiences _______ returns to scale when output increases by a smaller percentage than inputs.

A

Decreasing

23
Q

True or False: Constant returns to scale occur when firms increase inputs and receive an equal percentage increase in output.

A

True

24
Q

What is the relationship between short-run average cost (SRAC) and long-run average cost (LRAC) curves?

A

LRAC is an envelope for all associated SRAC curves

25
Q

What happens to the average fixed cost curve (AFC) as output increases?

A

AFC falls as fixed costs are divided by a larger output

26
Q

What is the significance of the point where the LRAC curve levels off?

A

It indicates the minimum efficient scale

27
Q

What are diseconomies of scale?

A

Diseconomies of scale occur when a firm’s costs per unit increase as it grows larger.

28
Q

How can workers’ motivation be affected in a large business?

A

Workers may feel their efforts go unnoticed, leading to decreased motivation and personal commitment.

29
Q

What geographical issues can large firms face?

A

Large firms may struggle with the transportation of finished products over long distances and controlling distant parts of the business.

30
Q

Why might a large firm struggle to respond to change?

A

It takes much longer and is more difficult for a large firm to adapt to changes.

31
Q

How does the demand for raw materials affect production costs in a growing business?

A

Increased demand for raw materials can raise prices and thus increase production costs.

32
Q

What are the challenges of management in a growing business?

A

Coordination and control become more difficult, leading to poorer quality work and less effective business decisions.

33
Q

How does communication change in a large business?

A

Communication can become slow and lose accuracy due to distance and the number of people involved.

34
Q

What is the definition of profit?

A

Profit is the difference between revenue and costs.

35
Q

What is the condition for profit maximization?

A

Profit is maximized when total revenue (TR) is above total costs (TC) and when marginal cost (MC) equals marginal revenue (MR).

36
Q

What is normal profit?

A

Normal profit is the return sufficient to keep the factors of production committed to the business.

37
Q

What indicates supernormal profit?

A

Supernormal profit occurs when average revenue (AR) is greater than average cost (AC) or when total revenue (TR) exceeds total costs (TC).

38
Q

What constitutes a loss for a firm?

A

A loss occurs when average revenue (AR) is less than average cost (AC) or when total revenue (TR) is less than total costs (TC).

39
Q

What is the short-run shut-down point?

A

The short-run shut-down point is where average variable cost (AVC) equals average revenue (AR).

40
Q

When should a firm continue production despite making a loss?

A

A firm should continue production if AVC is less than AR, as it helps to cover some fixed costs.

41
Q

When should a firm shut down immediately?

A

A firm should shut down if AVC is greater than AR, as producing more will increase the loss.

42
Q

What is the long-run requirement for a firm to stay in the industry?

A

In the long run, a firm needs to make at least normal profit to remain in the industry.

43
Q

What is the relationship between MR and MC at the profit-maximizing output?

A

The profit-maximizing output occurs where marginal revenue (MR) equals marginal cost (MC).

44
Q

Fill in the blank: A loss is where the firm fails to cover its costs, _______.

A

AR < AC or TR < TC

Y2 Micro (6 decks)

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